What's Hot in Ice Cream?

On an unusually cold spring evening, chilled customers queued up on New York's 42nd Street to pay $5 or more for a Cold Stone Creamery ice cream confection. Business is sweet for the $285 million — up from $45 million in 2001 — premium ice cream chain that's No. 12 on Entrepreneur magazine's 2005 list of the fastest-growing franchises.

Why stand in line to spend so much money for a freezing concoction on a frosty evening? Call it the “Starbucks Effect,” says Ron Paul, president of restaurant research firm Technomic Inc. in Chicago. “Consumers are willing to pay more and wait a little longer perceiving they're getting more of an upscale experience along with more ‘made-for-me.’” (Cold Stone customers can personalize their choice through a combination of more than 12 ice cream flavors and any combination of 38 mix-in ingredients.)

Super-premium mix-in chains such as Cold Stone Creamery and Marble Slab Creamery (No. 91 on Entrepreneur's list) are hot even as overall ice cream store sales remain flat at $9 billion a year. Accelerating store rollouts, exasperatingly long customer lines and ambitious global expansion plans all signal they are taking business away from the chocolate- and vanilla-variety shops.

“Consumers are trading up across all categories, and super-premium ice cream is just an extension of that,” says Jenn Johnston, marketing director at MaggieMoo Ice Cream & Treatery, a third chain that's gaining popularity. Linda Utterback, executive director of the National Ice Cream Retailers Association agrees: “Once people decide to go out for dessert, they're not looking for low-fat; they go all-out.”

Cold Stone is the clear leader. Its shops generate, on average, more than $400,000 in annual sales, according to Brett Sheets, Cold Stone vice president of real estate. Marble Slab stores average closer to $260,000, says Chris Dull, vice president of franchise development. Cold Stone has opened about 970 shops and signed 1,000 additional franchise agreements. Marble Slab has 455 shops, with expectations of 800 by 2008. The growth plan at MaggieMoo is also “accelerating,” says Johnston. “We currently have 150 shops, though an additional 90 will be open by the end of the year.”

Cold Stone's founders, Don and Susan Sutherland, opened their first shop in the college town of Tempe, Ariz., in 1988. But the chain's rapid growth didn't begin until 1995, when Doug Ducey, who had previously held marketing positions at Procter & Gamble and Anheuser-Busch, was brought in to handle business development. The company began franchising the following year.

“That was a pivotal moment,” says Chief Operating Officer David Andow. “We've never looked back.” Cold Stone's success, says Andow, is due in part to an area-developer franchise model that gives a level of independence to owners in well-defined regions. Management also set audacious goals. When he took over, Ducey projected 1,000 stores by 2005; he was off by less than 50.

The Sutherlands didn't invent the concept of mix-ins, first popularized at Steve's of Boston in 1973. The idea is to scoop up the ice cream, flatten it on a cold stone or marble slab (hence the names) with metal spades and blend in the desired ingredients, ranging from fruits to candy bars to nuts. Steve's stores closed, but the owner, Steve Herrell, now runs four Herrell's ice cream shops in Massachusetts.

“My most important contribution was to make a really great ice cream with a low amount of air,” says Herrell. “For decades, manufacturers had increased the amount of air in the ice cream and thereby reduced costs. I still consider the mix-in to be sort of a gimmick and the quality of the ice cream to be the priority.”

Mark Siebert, chief executive of Chicago-based consultancy iFranchise, also questions the allure of mix-in. “The customized show is one of their great strengths, but it's also a negative,” he says. “Unlike a traditional ice cream store, where people get served relatively quickly, there's a one-and-a-half or two-minute serving time. And because you serve fewer customers and you have a higher cost of labor on a per scoop basis, you have to charge a higher price.”

But those willing to line up at Cold Stone for say, Birthday Cake Remix, a blend of cake batter ice cream, rainbow sprinkles, brownies and fudge, or Paradise Found, a mixture of white chocolate ice cream with coconut, pineapple and banana, might disagree. They are doubly drawn by high-quality ice cream and the thrill of getting a customized dessert.

To be sure, the total count of all three super-premium shops is still small compared with Dairy Queen's 4,800-plus stores or the 2,300-plus outlets of Baskin-Robbins Inc. But super premiums are scooping market share away from the older, simpler chains.

Cold Stone has about 30 mall and 200 “downtown big-city” locations, including six destinations in Chicago and three in New York City. The Times Square location is “definitely the highest volume store in our system,” notes a spokesman. But it favors suburban lifestyle centers with movie theaters and book stores and full-service restaurants where there's foot traffic late into the night. That's just fine with other retailers since most people buy their ice cream between 6:30 p.m. and 11:30 p.m., extending the hour shoppers visit a center.

Cold Stone also likes grocery-anchored neighborhood centers where the family drives (and can easily park) to get the kids some ice cream, adds Sheets.

Of 147 Marble Slab stores, about 12 percent are in enclosed-malls, with the balance mostly in upscale strip centers. It has just three freestanding locations. “We want high foot traffic,” says Dull. “We want lots of people walking past and getting excited about the concept when they see the lines.”

Those long lines sometimes attract not only customers, but prospective franchisees. Take Scott Otis, for example. The owner of two pizza franchises recently opened the Cold Stone Creamery at Jordan Creek, a new hybrid mall in West Des Moines, Iowa. “While visiting Lincoln, Neb., we saw the lines out the door,” he recalls. “After deciding not to wait in line and coming back the next day and still seeing lines out the door, we thought: ‘Here was a product we should check out.’”

Developers are impressed with the long lines, too. “Customers are responding overwhelmingly to Cold Stone,” says Eric Almquist, general manager General Growth Property's West Des Moines Iowa, mall, where a Dairy Queen is also located “At times there will be 50 or 60 people in line,” Almquist says. “Some people respond to the variety you can get at Cold Stone; others still respond to the old staple they know at Dairy Queen.”

As the Starbucks model suggests, hot retail concepts are exportable. All three super-premium ice cream chains are becoming missionaries of dessert. Cold Stone is heading first for Japan. Marble Slab is bound for the United Arab Emirates. And MaggieMoo is growing its store base in Thailand.

Cold Stone's Asian strategy is being led by Lawrence Maltz, the man responsible for taking Starbucks to China. “Maltz has put together a deal with an [unidentified] company that will become our area developer in Japan,” says Andow. Stone Cold hopes that with Maltz's help, its chain will join Starbucks as a model for upmarket, customized chains where patience and deep pockets are required.

Ice Cream Decoded

Super-Premium Ice Cream has very low air and high fat content, and uses only the highest quality ingredients.

Reduced Fat Ice Cream is made with 24 percent less fat than ice cream. Light or Lite Ice Cream is made with 50 percent less fat or 1/3 fewer calories than ice cream, provided that, in the case of calorie reduction, less than 50 percent of the calories are derived from fat.

Low-fat Ice Cream contains no more than 3 grams of fat per serving.

Nonfat/Fat-Free Ice Cream contains less than 0.5 grams of fat per serving.

No Sugar Added Ice Cream may contain artificial sweeteners, but is not sweetened with added sugar.

Sorbet is a frozen dessert similar to an ice. It is a nondairy product.

Frozen Yogurt is a frozen dessert similar to nonfat/low-fat ice cream; mixes containing cultured skim milk and live active cultures. The fat content is less than 4 percent.Source: Cold Stone Creamery Industry Overview

THE STARBUCKS EFFECT

CHALLENGE:

In this low-cal, low-carb, budget-minded world, how do you sell ice cream that can cost $5 or more a pop? Cold Stone Creamery and Marble Slab Creamery researched what consumers want. And they learned that they want super-premium ice cream with mix-ins.

SOLUTION:

Reduce the air in ice cream, supply dozens of mix-ins and add entertainment to make visiting the ice cream shop a destination experience. Don't even try to compete with the Baskin-Robbins and Dairy Queens. It's a whole different ball game.

BUZZ:

Asia is the next stop for premium, mix-in scoop shops. Cold Stone is heading first for Japan. Marble Slab is bound for the United Arab Emirates. And MaggieMoo is growing its store base in Thailand.

DATA:

U.S. production of ice cream totaled 1.6 billion gallons in 2001 — or 23 quarts per person, according to the USDA. That year, sales of ice cream and other frozen desserts reached $20.7 billion.